Long-Term Real Estate Investment Strategies

Q: I previously wrote to you and asked about investing in real estate. Since that time, I’ve moved from thinking about buying a single family house or two to actually purchasing and rehabbing about 45 units located in about 15 buildings.

We chose multi-family as our desired real estate investing platform and are now unloading most of our single family homes via lease optioning. It’s been life changing and brain chemistry altering to be sure! But all-in-all, it’s been a good show.

We started about two years ago. Basically, we had a 5 to 7 year plan for property acquisition and condensed it into 2 years. As we’ve gone along, we’ve learned a lot and as a result we’ve paid less and less “per unit.”

Recently we purchased a 10 unit building for about $16,500 per unit (before upgrades). We’ve taken advantage of our state’s weatherization credits to get around $30,000 in repair money back or about 50 percent of what we spent in weatherizing our units, which allow us to lease out our units for more money (because our tenants save money).

Thanks for your guidance the last time. Just thought you’d want to hear the update.

A: Thanks for the update. It’s good to hear that someone has some good news in this real estate market.

It’s true, there are great finds out there for those with the cash and desire to still be in real estate. Even in the worst of times, there are those with the stomach to dive into the market. Good for you.
But what we like better is that you’ve taken what you’ve learned and applied that knowledge going forward. To purchase units at around $16,500 each should allow you a decent amount of income going forward, not to mention the opportunity for price appreciation.

It’s interesting that you decided to move out of buying single family homes into multifamily buildings. For many years, real estate investors have found that multifamily buildings gave them the scale they needed to succeed in real estate.

Single family homes allow a real estate investor to focus his or her energy on one building. But investors may find that their time and resources may be allocated to those multifamily buildings more efficiently. When you renovate a multifamily building, you can renovate multiple units at one time, have one location to maintain, supervise and care for, all the while you might have four, six, eight or more tenants in that same building.

While you do have efficiencies in owning a multifamily building, your market for a buyer, once you decide to sell the building, will tend to be another real estate investor. As you have probably found out, you can own a single family home and rent it out, and when you decide to sell the home, you may have investors look at the home or people that are looking for a home. The only difference would be if you turned your property into a condominium and then sold off the units to the tenants (hopefully).

An interesting comment in your letter is that you have now moved from thinking about the pricing of a building as a whole to the price per unit. Most successful real estate investors know that the price of the building does not matter as much as the price for each unit purchased. If there are two buildings side by side and one has ten units and the other fifteen and they both are selling for the same price, the price per unit for the fifteen-unit building may be a better deal.

There is more that goes into the per unit price, especially if the ten-unit building is made up of three bedroom units while the fifteen unit building is made up of two bedroom units. Depending on the market, the two bedroom units may be of greater demand than the three bedroom units.

Of course, the condition of the building and the units is important, but looking at a per unit price can assist you in deciding how much money you can put into each unit to bring those units up into rentable shape and how much rent you can get for each unit in that market.

While every real estate market is different, if you find a building near a university, one type of unit may likely rent faster and for more money than another. If the property is located near a business district, you may find that single professionals may be your target audience. Finally, if you find a building where young families might be the norm, you may want a building with larger units to accommodate those families.

But in each case, understanding what you will pay for the building, along with the price per unit, is definitely important and part of the mix in becoming a successful real estate investor.

While you didn’t mention whether you were working with lenders to obtain financing for your purchases, these days lenders are scarce and lending requirements for investors like you are quite tight. I hope you have found a method to finance your purchases and have a good team in place to assist you through the purchase of your buildings.

Finally, don’t forget, if you decide to sell your buildings you’ll need to plan ahead. You might need or want to undertake a 1031 exchange at the time of the sale of any one of your buildings to defer the payment of any federal income taxes.

The use of tax deferred exchanges is an integral part of the strategy of owning investment real estate and maximizing the money invested in those properties for further investment in more real estate investments.


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